My four mortgages in 15 years have got cheaper every time: After years of rate cuts can we convince people to fix for life? asks SIMON LAMBERT
Would you fix your mortgage until it ends or would you rather take the gamble that paying less now won’t be offset by higher rates in the future?
Until now this has been a largely theoretical question, but now a new mortgage is being launched by Habito that lets borrowers lock into a fixed rate for up to 40 years.
You read that right, a four decade-long fix.
No need for a rate reminder: Would you take out a set and forget mortgage with a fix that lasts the entire lifetime of the loan
Step back in time that far and you’ll find a year in which Charles and Diana got married, Ian Botham performed some Ashes heroics at Headlingley, Arthur Scargill was elected president of the National Union of Mineworkers, and The Specials reached Number 1 in the charts with Ghost Town.
You’d also have been very unlikely to get a building society to agree to a 40-year mortgage term in 1981, let-alone a fix.
Step forward 40 years and who knows what will be happening (hopefully we’ll be out of lockdown by then) but with this new mortgage you could be making the last payment on a 4.85 per cent fixed rate.
Long-term fixed rate mortgages are seen as one way to take some of the risk out of Britain’s property market casino and to break the short-termism rampant in our home loans market, where the two-year fix still remains our favourite product.
I can certainly see the merit in the idea and our mortgage market isn’t the way that things have to be – in France, for example, fixing for a long time is commonplace.
In contrast, the longest bank or building society fixes on the UK market until now have been 15-year deals, but these are only offered by two providers Yorkshire Building Society / Accord and Virgin Money.
I should state clearly here that I am not in favour of 40-year mortgage terms, however. The lengthening of terms to squeeze people into affordability tests, feeds into house prices being sustained at exceptionally high levels compared to wages.
What I can see the merit in is ending the remortgage every two years merry-go-round that exacerbates financial instability for some borrowers and aids mortgage industry profits.
Ten-year fixes are a bit less unusual but even these remain very much niche products.
Notwithstanding the lack of public enthusiasm, the idea of long-term fixed rate mortgages has been floated countless times in the 15 years that I’ve been at This is Money.
15 years of mortgages
This is how the rates on my mortgages have fallen over the past 15 years:
2006: Five-year fix – 4.99%
2011: Five-year flexible tracker – 2.75%
2014: Lifetime tracker offset – 2.74%
2020: Five-year fix – 1.4%
In that time, I’ve been through four mortgages and the rates have got cheaper every time.
The first was a five-year fix at 4.99 per cent in 2006, widely regarded as cheap money at the time.
We moved home about six months before the end of that – costing me an infuriating £1,600 or so in early repayment charges – and I then took a five-year tracker with no exit fees in 2011, which I fully expected to have to jump ship from before the end, as interest rates would surely rise.
Rates didn’t rise. I did bail out before the five years was up though for a slightly less expensive lifetime tracker offset mortgage, which astonishingly got cheaper still when the base rate was cut after the Brexit vote.
For a brief period of time, that lifetime tracker did get a bit pricier than when we took it out – as the Bank of England managed to edge rates above 0.5 per cent between August 2018 and March 202, but the offset savings cushioned that nicely.
We sold up just before rates were slashed for the coronavirus crisis last spring, and then after a brief hiatus took out a five-year fixed rate last summer at just 1.4 per cent.
That astonishing path downwards for mortgage rates – from a point where they already looked good value 15 years ago to the exceptionally cheap money today – is a major stumbling for selling long-term fixed rates to a short-term fix obsessed British public and mortgage broking industry.
Common sense says the decline in rates is an aberration and many people reading this will either remember the 10 per cent-plus rates that bit them 30 years ago, or will simply have to ask their parents to tell them about it.
But people will also look at the 4.85 per cent rate on Habito’s 36 to 40-year fix at 85 per cent loan-to-value, or even the 4.14 per cent rate on the 21 to 25-year fix and think that looks expensive.
The alternative could be a five-year fix at about the 2.6 per cent mark.
This is the difference between paying about £800 per month for the 40-year fix or about £570 for the five-year fix and the extra cost will very soon add up to a substantial amount – over five years it’s £13,800.
Maybe at some point in the future base rate will be back at 6 per cent and those extra payments might seem a bargain. Would you take that gamble?